Understanding Occurrence vs. Claims-Made Policies

General Liability, including Products Liability, may usually be purchased as either Occurrence or Claims-made coverage and understanding the differences may seem difficult. As a general rule, Occurrence coverage offers superior protection but it can be significantly more expensive than Claims-made coverage.

Occurrence coverage:

The superior Occurrence coverage protects against covered lawsuits as long as the policy is in force when the bodily injury or property damage occurs. As long as this condition is met, coverage is not jeopardized if the policy is cancelled or not renewed when the claim or lawsuit papers are subsequently filed.

Claims-made coverage:

The inferior Claims-made coverage protects against covered lawsuits only when the following two conditions are met:

  1. The policy is in force when the bodily injury or property damage occurs (just like Occurrence coverage) AND
  2. The policy or a renewal of the policy is still in force when the claim is made (unless the proper tail coverage or extended reporting period has been purchased).

The second condition makes Claims-made coverage much more risky than the Occurrence coverage because the policy may not be renewed if the insured manufacturer or distributor can’t afford the renewal premium, shuts down operations, or if renewal terms are not offered by the carrier.

Complications when trying to switch from Claims-made to Occurrence

Manufacturers or distributors with Claims-made coverage that shut down their operations may elect to buy “tail” coverage (AKA extended reporting period coverage), which in effect converts their prior Claims-made policies into an Occurrence policy; however, this can be quite  expensive.

Changing a Claims-made policy to a new carrier upon renewal may be tricky because of a provision in a Claims-made policy known as a “retroactive date.” It is critical that the retroactive date is always set to be the first date that the first Claims-made policy was effective.

Even though Occurrence coverage is clearly superior for the reasons stated above, many start up operations opt for Claims-made coverage due to the affordability issue. The above information on Occurrence, Claims-made, bodily injury, property damage, coverage triggers, retroactive dates, and tail coverage have been greatly simplified for explanation purposes. You should always consult with a business insurance professional before making critical decisions in these areas.

Six reasons why the Occurrence Policy is superior to the Claims-made Policy

1. Your current or future contract with a vendor may require an Occurrence Policy in order to do business. Simply put, the Occurrence Policy provides better protection for your vendors. If you were to go out of business or discontinue a product, your vendor wants to be protected by your policy (ex: legal defense and payments for settlements or judgments) if there are any past injuries involving your products that could result in a future lawsuit. An expired claims-made policy is not going to respond to these past injuries, unless you have purchased the “extended reporting period option.”

2. It is easier to change carriers at renewal. Claims-made policyholders may find it impossible to change insurance carriers once an actual claim has brought your risk potential to the attention of insurance underwriters. Even if you can get a quote from another insurance carrier, it will be difficult to negotiate the proper retroactive date (see definition above) to change to a new Claims-made insurance carrier or nose coverage to change to a new occurrence carrier.

3. You are better protected if you can no longer afford insurance and have to “go bare” while continuing to operate. With an Occurrence Policy, at least you know your past policy(ies) will respond to any injuries that occurred while such policy(ies) were in effect. On the other hand, the Claims-made policy or a renewal has to be in effect or current at both the time of the injury AND the filing of the claim in order to respond.

4. If you have discontinued a hazardous product line, any past injuries involving your products are covered by the insurance policy that was in force at the time of the injury. With a Claims-made policy, the policy renewal must be in force both at the time of the injury AND when the claim is filed.

5. If you go out of business and cease operations you have some comfort in knowing any past injuries involving your products are covered by the insurance policy that was in force at the time of the injury. With a Claims-made policy, the policy renewal must be in force both at the time of the injury AND when the claim is filed.

6. If you sell your company, the new buyer is more likely to accept liabilities of your past products in the marketplace. With a Claims-made policy you are more likely to have to purchase the “extended reporting period” on your Claims-made policy and be responsible for all liabilities for at least two more years.

It is important to note, that many hazardous products with a long product life may be impossible to insure with an Occurrence Policy. I believe this is because an insurance carrier can better cut their losses by non-renewing a claims-made policy versus an occurrence policy.

Need help choosing the right policy? Contact Paul Owens for assistance.